USAID Book Club: Why Nations Fail

Synopsis: Why Nations Fail is a sweeping book aimed at answering one of the most critical questions facing the world today: why are some nations rich and others poor? Authors Daron Acemoglu and James A. Robinson argue that it is political and economic institutions that underlie economic success. More strongly, they argue that development differences across countries are exclusively due to differences in political and economic institutions, and reject other theories that attribute some of the differences to culture, weather, geography or lack of knowledge about the best policies and practices. Written for a non-technical audience, the book romps through several thousand years of human history by drawing on examples from the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, the United States, countries in Africa, and China to build a new theory of the political economy of development. It also looks forward, asking whether China’s rapid growth will continue, whether America’s best days are behind it, and whether western aid organizations use the best approaches and ideas in helping reduce poverty.

USAID Chief Economist Steven Radelet. Official Photo

Steve Radelet: If you like books that focus on the big questions of development and put today’s development challenges in a broad historical context, you’ll love Why Nations Fail. This is a very ambitious book written by two of the world’s most respected academic development economists, and is a must-read for anyone interested in why some countries are rich and others poor.

The authors make a strong case for the importance of institutions – property rights, rule of law, a level playing field and strong incentives of investments in new technologies and skills – in explaining differences in development across countries. They further argue that bad institutions are the product of political systems that create private gains for elites in developing countries and impoverish the broader society along the way. Countries with “extractive” economic and political institutions remain impoverished, whereas those with “inclusive” institutions are able to achieve sustained income growth and lift people out of poverty.

There is much that is right about this argument. But the book falters by overreaching and by arguing that differences in development progress are due exclusively to institutions. It dismisses the view that bad ideas – whether they be cultural ideas such as that women should be subservient, or economic ideas such as massive central planning – lead to poverty , and argues that while these are important they ultimately are caused by differences in institutions. Sometimes the arguments seem to get a bit circular. The authors believe the geography does not matter, and that institutions explain all of the income differences between land-locked deserts like Chad and coastal city-states like Singapore – a view that makes little sense to me.

And they take a shot at institutions like USAID that provide technical and policy advice to developing countries, arguing that we are wasting our time because while elites in developing countries know the right thing to do, they choose to do otherwise for their own self-interests. There are undoubtedly many elites that fit that picture, and we all know. But those of us who work with capacity-constrained governments in low-income countries that do not have the expertise to analyze what has worked around the world will find this conclusion puzzling and at odds with our own experiences. We have all worked with senior officials that want to do the right thing, but do not know the options and want to learn more about best practices and experiences from successful countries.

This is a book that will make you think hard about why some countries are rich and others poor, what we do, why we do it, and how we can best contribute to developing country’s efforts to fight poverty and achieve development success. Read it and let the debate begin.

Discussion Questions:

How do institutions create the incentives that lead to sustained development and poverty reduction?

Do you think that institutions explain all of the differences in development across countries, or are some of these differences due to geography, culture, ideas or even just luck (good or bad)?

The book argues that China has so far developed with extractive rather than inclusive institutions, and therefore China’s rapid growth cannot continue and may even collapse. Do you agree?

What are the implications of the arguments in this book for USAID and how we direct our assistance?

Get Involved: Use the comments section of this blog post to share your answers, or tweet them to us at #fallsemester.

2 Comments

I stumbled across the USAID Book Club a few months late, but I just read Why Nations Fail about a month ago. Mr. Radelete, you made me feel so much better about the way I thought of the book. I can’t count the number of times I nearly put it down because I thought it was too circular and was overreaching much too far.

I absolutely think that institutions play a role in development and poverty reduction, but they are far from the only reason for it. I think the authors were right to contrast the strong property rights of Western Europe and America to the communal land of the Soviet Union. Property rights give people incentive to take more risks and work harder because they own the property and the results of their work. However, I think that culture and geography are two additional factors that are very strongly tied to development. The more taxing your environment, the harder it will be to meet your basic needs. This a a real factor for people living in desert environments as well as those who’s environment is subject to frequent flooding, such as much of Southeast Asia. Cultural norms are strong and may prevent people from adopting certain behaviors or habits that could make them more productive. And as much as we hate to admit it, yes, sometimes it’s just plain dumb luck.

I do agree that China will not experience rapid growth forever, but I do not think this is entirely due to institutions. They play a role, but China has been playing catch-up overall these last few years. As they catch-up to America and the West, progress will be harder to come by, slowing growth. China is also facing a more competitive international market as pressures increase for them to allow their currency to float freely in currency exchanges. This makes their exports, which are a large part of their economy, harder to sell. We are already seeing wages in China rising to the point that new production is choosing to locate in Vietnam and SE Asia where labor is cheaper.

I believe USAID’s work in governance and economics already focuses on the areas that the book implicates are important: promoting strong property rights, innovative technological developments, and governments that are democratic and truly represent the people. I do not agree with the book’s assessment that foreign aid organizations have it wrong. There is more at work in a society than it’s institutions and all influences on growth and development must be examined to get the greatest benefit in a given society.